Risks: Describe the risks that Koala Fun faced as a company.

Management: In what ways was Koala Fun not being managed to obtain optimum performance from its assets?

Explain. Decisions: How does this case demonstrate the importance of analyzing financial data when making financial decisions?

Recommendations: What recommendations regarding risk and profitability would you make to Koala Funs owners to improve their company? Briefly describe your recommendations.

Ratio Type	2012	2013
Current (times)	(2,136,800/573,200) = 3.73	(2,619,700/764,100) = 3.43
Quick (times)	[(2,136,800-765,400)/573,200] = 2.39	[(2,619,700-1,222,300)/764,100} = 1.83
Debt (%)	[(316,000+573,200)/2,361,100] = 37.66%	[(764,100+252,800)/2,879,500] = 35.32%
Times interest earned (times)	(322,400/37,900) = 8.51	(367,100/31,600) = 11.62
Inventory turnover (times)	(4,896,700/765,400) = 6.40	(5,866,200/1,222,300) = 4.80
Total asset turnover (times)	(6,572,800/2,361,100) = 2.78	(7,811,500/2,879,500) = 2.71
Average collections period (days)	[365/(6,572,800/1,004,200)] = 55 days	[365/(7,811,500/1,106,600)] = 51 days
Return on equity (%)	[170,700/(948,000+524,000)] = 11.60%	[201,300/(1,137,600+725,000)] = 10.81%

BILLION?DOLLAR COMPUTER GAME companiessuchasActivision, Blizzard, and Zynga are unusual in the electronic arts industry, which consists primarily of small developers. One such firm is Koala Fun (KF), located in Baltimore, MD. KF was started seven years ago by Owen Charles and Tessa Benjamin, who between them had over 15 years of experience with various computer systems design companies. The partnership initially blended very well. Owen, reserved and introspec- tive, is creative with a flair for designing games and spotting trends. Mainly as a result of his genius, the KF brand is synonymous with intriguing electronics with high graphic appeal. Tessa, more outgoing with a strong marketing focus, has assumed the role of the firms chief operating officer. THE PARTNERS FIRST SUCCESS The first successful product the two partners developed was a game called Koala Fun, which they used as the company name. The game uses a cute image of a koala bear cub chasing treasure and villains around coastal Australiathe koala homelandwhile helping rescue heroes and animals. The game was so successful that various spinoff products were licensed, including stuffed toys and a movie. The Chinese even picked up on the idea and joint?ventured games with KF using a giant panda as the theme. Tessa was particularly good at marketing opportunities like the panda deal and working with resellers like the retailers GameStop and Target, the online merchandiser Amazon, and other large companies. She also sold to smaller resellers who provided national and some global distribution. However, the Great Recession and the resulting reduction in consumer discretionary spend- ing affected KF. In addition, competition from free or low?cost Internet games made it more difficult to sell the tens of thousands of games and other products required for an assured, constant revenue flow. A problem with this industry is that it experiences cyclicality, as players (usually children and teens) move on to other activities. The company enjoyed initial success, showing profits by its second year. Owen and Tessa preferred to work on designing new games and the development of marketing strategies over the administrative aspects of the business. As the result, new games and products were in development and production costs escalated, but sales were somewhat slow to be realized. FINANCIAL CONCERNS Owen and Tessa loved their company but were inexperienced in business matters. Owen asked his mother, Amy, an accountant, for assistance. After studying the ledgers and other records, she reported that there was a signifi- cant working capital problem with declining cash, unsold inventory (mostly old Koala Fun games), and vendors who had not been paid. Tessa had been handling this side of the company, but that had mostly involved writing checks to employees and for payables while waiting around airports. Files were misplaced, documents were missing, and some money was unaccounted for. The problems appeared to be more related to failing to priori- tize financial matters rather than any deliberate mistakes. Owens first reaction was to consider the sale of his half interest in KF. Though he has enjoyed the creative side of the business, he was upset by his mothers report and by Tessas apparent failure to take care of that responsibil- ity. Periodically, some of the resellers KF deals with have encountered finan- cial problems and have strung out their payments, which often caused a mad scramble for cash at KF. And if Owen decides to sell, he knows that he is likely provide it. Owen is skeptical of this argument and wonders if there isnt a more efficient way of providing good service. He also questions Tessas credit standards and collection procedures, and believes that Tessa has been quite generous in granting payment extensions to customers. At one point, nearly 45 percent of the companys receivables were more than 90 days overdue. Furthermore, Tessa would continue to accept and ship orders to these resellers even when it was clear that their ability to pay was marginal. Tessas position is that she doesnt want to lose sales and that the difficult times are only temporary. Owen wonders about the wisdom of passing up trade discounts. Vendors frequently offer KF terms of 11?2/10, net 30. That is, KF receives a 11?2 percent discount if a bill is paid in 10 days and in any event full payment is expected within 30 days. Tessa rarely takes these discounts because she wants to hold onto our cash as long as possible. She also notes that the discount isnt espe- cially generous and 981?2 percent of the bill must still be paid. FINAL THOUGHTS Despite all of Owens concerns, however, the relationship between the two partners has been relatively smooth over the years. And he admits that he may be unduly critical of Tessas management decisions. After all, he concedes, she seems to have reasons for what she does, and we have never lost money since we started, which is an impressive record, really, for a firm in our business. Owen has discussed with two advisors the possibility of selling his half of the firm. Since KF is not publicly traded, the market value of the companys stock must be estimated. The consultants believe that KF is worth between $35 and $40 per share, figures that appear reasonable to Owen.